SEBI prescribes conditions for buying, selling & transacting in Credit Default Swaps

Circular no. SEBI/HO/AFD/PoD/CIR/2023/15, Dated 12.01.2023

Recently, SEBI allowed AIFs to participate in Credit Default Swaps (‘CDS’) as a protection for buyers and sellers. With regard to the same, SEBI has notified various conditions for buying, selling & transacting in CDS. Category I and Category II AIFs are only allowed to buy CDS for hedging purposes, whereas Cat III may buy for hedging purposes.

Further, Category II AIFs and Category III AIFs may sell CDS, by earmarking unencumbered Govt. bonds/Treasury bills equal to amount of said CDS exposure.

The AIFs shall report details of CDS transaction to the custodian, by the next working day in the manner specified. Also, Custodian, shall put in place a mechanism to collect necessary details from AIFs transacting in CDS, to monitor the compliance with conditions.

Further, Cat I and II AIFs shall not borrow funds directly or indirectly and engage in leverage except for meeting temporary funding requirements for not more than 30 days, not more than 4 occasions in a year and not more than 10% of the investable funds.

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